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Banks (Finance)

India's "Bad Bank" Plan: A Route to Securitize Non-Performing Assets

Strategic Insights

— 2 min read

India's government has proposed the setting up of a bad bank, or National Asset Reconstruction Company Limited (NARCL), to tackle the country's non-performing assets (NPAs) held by banks. The NARCL will purchase NPAs from banks under a 15:85 structure, where it will pay up to 15% of the agreed or discounted value in cash and issue Security Receipts (SRs) for the remaining amount. The government will provide a sovereign guarantee for the SRs, valid for five years, to cover potential losses. The NARCL aims to resolve stressed loan assets worth Rs200,000 crore, with the initial phase focusing on fully provisioned assets valued at Rs90,000 crore.

Key Takeaways:

  • The NARCL will be owned by public sector banks (PSBs) with 51% stake and 16 other entities, including private banks and non-bank finance companies.
  • The NARCL will purchase NPAs from banks, with a 15:85 structure of payment in cash and issuance of SRs.
  • The government will provide a sovereign guarantee for the SRs, valid for five years, with a provision of Rs30,600 crore.
  • The NARCL aims to resolve stressed loan assets worth Rs200,000 crore, with an initial focus on fully provisioned assets valued at Rs90,000 crore.
  • The Insolvency and Bankruptcy Code (IBC) mechanism has been criticized for a revised RBI circular dated June 7, 2019, which gave too much flexibility to lenders in working out the resolution plan.
  • The government has recovered over Rs500,000 crore from PSBs, but the decline in NPAs is limited to Rs200,000 crore, with Rs300,000 crore remaining due to fresh slippages.
  • The proposed mechanism requires the NARCL to hold a "Swiss Challenge" auction, but banks may prefer to give assets to NARCL due to the sovereign guarantee.

Statistics:

  • Rs30,600 crore provision made for the sovereign guarantee for the SRs issued by NARCL.
  • Rs36,000 crore potential loss if the NARCL does not realize any money from selling NPAs to investors.
  • Rs5400 crore paid in cash by NARCL to banks for the agreed amount.
  • Rs200,000 crore amount of stressed loan assets to be resolved by NARCL.
  • Rs90,000 crore initial phase of fully provisioned assets to be taken over by NARCL.
  • Rs15% of the agreed or discounted value to be paid by NARCL in cash to banks.
  • Rs85% of the agreed or discounted value to be issued as Security Receipts (SRs) by NARCL.

Sources:

  • "Union Budget for 2021-22" by Finance Minister Nirmala Sitharaman.
  • "Statement in parliament by Minister of State for Finance Bhagwat K Karad".
  • RBI circular dated February 12, 2018.
  • RBI circular dated June 7, 2019.
  • Pioneer newspaper article published by HT Digital Content Services.

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